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Betas and Cost of Capital Evaluation

Client: GB £ 1200m turnover UK based vehicle services business

Project: Betas and Cost of Capital Evaluation

Situation

Our client was reviewing their borrowing capacity, as a precursor to conducting business growth activities.

  • Determination of Betas & Cost of Capital for a UK plc and subsidiaries.
  • The results were to be used by client's Corporate Finance team to define the correct level of corporate borrowing capacity to support growth by acquisition.

 

Task

Our role in this assignment was to:

  • To work with the Operations Director to carrying out due diligence (in English & German languages) of the German target in Germany
  • To assess the market place competition and dynamics
  • To evaluate existing operations and devise synergies with associated benefits & risks
  • To present back to the client in the UK.

 

We used a structured method over a four week period:

  • To review the existing operations
  • Compare and contrast versus the known UK operations
  • Evaluate the areas of difficulty and risk
  • Prepare a final report

 

Outcome
  • We were asked to assist with evaluating the most recent Cost of Capital, and to go back to fundamentals of the Capital Asset Pricing Model.
  • We evaluated published geared Betas from comparable businesses and derived the client's cost of equity.
  • The calculated WACC helped the client to define the hurdle rate for new projects and to scope out the level of incremental borrowing capacity.



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